Chile - Review of ten-year national development program (Vol. 1 of 3) : The General Report, chapters 1-3

RETURN TQ R E S T R I C T E D REPORTS DESK rrrr (^DU Report No. WH- 116b WITHIN FILL CUOPY ONE WEEK This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT A REVIEW OF CHILE'S TEN-YEAR NATIONAL DEVELOPMENT PROGRAM Part I: Chapters 1-3 The General Report April 9, 1962 Department of Operations Western Hemisphere  GENERAL MAP OF CHILE RLAILWAYS 0 100 200 300 400 500 PAVED ROADS KIL0METERS OTHER ROADS CONCEPC I ON AriCa Leb. n ol Roogoc~~~~~~~~~~~~~~~~~~~~~~~~~coi Pisau; D Gj8O C Iquiquei i LD< Loncoche V1ldi vi 6a lh Mel-lone AnCud ANTOFAGAST A Toltol ~ RL's ChEd>-at'Cha a V t C o~~~~~~~~o 0 n~~~~~~~~~~~~~A~sen- Coldeoa n,oJ.b, Q. Coqu mbop opo LA SERENA Z Coqu mbo EqMi VALPARAISO P Son Ato io SANTIAGO clNot IARCH 1962Are 1 Fer Po-oeni ToCa CONCEPCIO N h I n _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ MARCH 1962  Currency Equivalents: 1 escudo equals US$ 0.95 (official rate)* 1 US$ equals EO 1.05 1 escudo equals 1,000 Chilean pesos The following abbreviations are used: CAP: Compania de Acoro del Pacifico (the Chilean steel company) CONFIN: Agricultural Extension Services (Consejo de Fomento e Investigaciones Agricolas) CORFO: The Government's Development Corporation (Corporacion de Fomento) CORVI: The Government's Housing Corporation (Corporacion de Vivienda) COPERE: The cabinet level Committee for Economic Programming and Reconstruction (Comite de Programacion Economica y de Reconstruccion) CORCHAC: The proposed Airport Authority (Corporacion Chilena de Aeropuertos y Aviacion Civil) COVENSA: The central sales agency for nitrates and iodine (Corporacion de Ventas de Salitre y Yodo) Empresa: The State Railways, officially known as Ferrocarriles del Estado, and frequently abbreviated FF.EE, but commonly referred to as the Empresa. EMPREMAR: Port Authority (Emp?esa Maritima) ENAMI: State Mining Enterprise (Empresa Nacional de Mineria ENAP: State Oil Monopoly (Empresa Nacional de Petroleo) ENDESA: State Power Corporation (Empresa Nacional de Electricidad) LAN: The Chilean National Airline (Linea Aero Nacional) * Since the Bank's Mission an additional free rate has been introduced for some transactions but all conversions in this report are at the above official rate.  TE1 MISSION John H. Adler Chief of Mission IMurray Ross Chief Economist Marius le Consquino de Bussy Adviser on Highways Sir Ralf B. Emerson Adviser on Railways Hans Meyer Transportation Economist Bertram I. Moyses Adviser on Ports George L. Reed Adviser on Housing and Urban Development Shigeharu Takahashi Agricultural Economist Bertil WJalstedt Industry and Power Economist John Lindeman Editor  TABLE OF CONTENTS INTRODUCTION SUMMARY PART ONE (Chapters 1-3) CHAPTERS 1 THE TEN-YEAR PROGRAM 2 THE PROGRAM OVER THE SHORT TERM 3 SUMMARY OF SECTOR RECOMMENDATIONS PART TWO (Chapters 4-8) 4 AGRICULTURE 5 INDUSTRY 6 MINING 7 FUEL AND POWER 8 BUILDING AND URBAN DEVELOPMENT PART TWO (Chapters 9-14) 9 TRANSPORTATION POLICY 10 RAILWAYS 11 ROADS AND HIGHWAYS 12 AIR TRANSPORT AND AIRPORTS 13 PORTS 14 SHIPPING  INTRODUCTION This is the report of a mission which was organized at the re- quest of the Chilean Government by the International Bank for Recon- struction and Development to review the 10-year National Development Program which the Development Corporation (Corporacion de Fomento -- coRFo) had prepared, The Program had been completed shortly before the earthquakes of Flay 1960 In the summer of 1960 it was revised to take account of reconstruction requirements. In October 1960 the Committee of Economic Programming and Reconstruction, (Comite de Programacion Economica y de Reconstruccion -- COPERE) was set up to carry out the program. The committee consisted of five members of the Cabinet -- the Ministers of Economy, Development and Reconstruction, Finance, Public Works, Mining, and Agricultua' -- the Vice President of CORFO, the General Manager of the Housing Corporation (Corporacion de Vivenda - CORVI) and the Director of the Budget. The task of the mission, as agreed between the Bank and the Chilean authorities in an exchange of letters, was to make: a. "an evaluation of the over-all magnitude of the program, its financial implications and the measures and policies proposed to achieve it; bo "a determination of the extent to which the financial allocation to various sectors is backed up by projects for which preliminary economic justifications and cost estimates have been prepared; and c. "an assessment of what further work needs to be done to firm up the projects and thereby the program." The members of the mission prepared for their assignment in Washington in May and arrived in Santiago during the first days of June. All but one of the members of the mission spent most of June and July in Chile, investigating and discussing with public officials and representa- tives of the private sector the various parts of the programo The rail- ways expert joined the mission for a shorter period. The members of the mission travelled widely throughout Chile to familiarize themselves with the conditions in the various parts of the count4y and to assess their particular needs. Before leaving Chile, the mission made an oral report on its preliminary findings to COPERE.  - ii - INTRODUCTION A preliminary draft of the report was discussed with Chilean officials during a second visit to Santiago in November and December of 1961, when additional information about the capital expenditure plans for 1962, 1963, and 1964 was obtained. In the course of these discussions it became clear that there was general agreement between the Chilean authori- ties and the mission regarding the volume and composition of public- investment expenditures, but that the difficulties regarding the mobiliza- tion of financial resources to carry out the development program had not been resolved. The mission wishes to record its appreciation for the help which it received from all Government agencies and from numerous persons in all walks of life and in all parts of the country. Without their assistance it would not have been possible for the mission to complete its task in the short time at its disposal. To name any person or group of persons as deserving our special thanks would be an injustice to all the others whom we met, singly or in groups, and who contributed with their knowledge and ideas to our understanding of the Chilean economy and its problems, and at the same time made our work interesting and our stay in the country most rewarding. 1vb The report of the mission is divided into b parts and 14 chapters. Part I summarizes the major findings and recommendations of the mission: Chapter 1 deals with the broad overall aspects of the pro- gram and Chapter 2 provides information on public-investment plans and projects in the next three years. Chapter 3 is a summary of the sector programs. In Part% II (Chapters 4-8) and TM (Chapters 9-14), we present our comments and recommendations on the sector programs. Although the 10-year plan covers the private as well as the public sector, we have concerned ourselves primarily with the public sector and those investment and related development activities in the private sector which will require financial support by the Government and Government agencies. This, of course, does not imply that we believe that the operations of the private sector are less important than those of the public sector or that they can be taken for granted. To the con- trary, we find ourselves in full agreement with the tenet of the program that the private sector should have the fullest scope for expanding its activities and that one of the primary objectives of public policy should be the encouragement (and where necessary the financial support) of pri- vate investment. But we believe that our comments and recommendations, to be operationally significant, should be directed in the first instance at the public authorities, who are in a position to take action on the meas- ures we recommend. Little would be gained if the plan, or our recommenda- tions, were to exhort the private sector to do some things and not to do others; and it would make no sense to prescribe, whether explicitly or by the only slightly more subtle device of detailed projections, what the private sector must do. The program, and our suggestions as well, imply,  - iii - INTRODUCTION of course, a certain performance of the private sector; but instead of considering this performance a test of the capabilities of the private sector, we would consider it an indication of the correctness of our own appraisal of the working of the Chilean economy and of the correctness of public policy. Although the program covers a 10-year period, and its objectives and the measures to attain them must be appraised with that in mind, it is clear that the earlier years are of more immediate interest than the later years. The plans for carrying out the program are obviously more firm for the first few years, while limitations of foresight make it impractical to formulate plans with the same degree of firmness for the more distant future. Therefore the mission was from the outset concerned more with the early phases of the program. To make this report more useful to those who are not familiar with the program (which has been published only in summary form) we present in each chapter a brief account of the plans which we were asked to appraise. Our comments, although stemming from a request for review and evaluation, have not been limited to 8nanalysis of the plan. Encouraged by the receptive response of the Chilean officials to our comments, we found that it would be useful and welcomed by the Chilean authorities if we interpreted our assignment broadly and paid close attention to those organizational measures and reforms which in our opinion are indispensable if the program is to be successfully completed. In that sense the recom- mendations of this report constitute the beginning of the second phase of the programming effort. During our discussions of the preliminary draft of the report we found that this interpretation of our intentions pre- vailed. The report thus suggests a line of action which we believe will enhance the prospects of the program being carried out successfully. WShile the final revision of this report was in progress (in January 1962), the foreign exchange system of Chile was modified. The rate of EO 1.05 per dollar, which prevailed when the development program and this report were prepared, became no longer generally applicable. For certain current and capital transactions, exchange was to be bought and sold at a free market in which the rate was to be allowed to fluctuate in accordance with supply and demand.  SUViARY 1. Chile's Ten-Year Development Program has been assessed against the background of Chile's economic experience. Once among the most vigorous and rapidly developing economies in Latin America, Chile has suffered from pro- longed inflation and stagnation during the last two decades9 which has led to a loss of confidence in the capacity of the country to provide rising incomes for its people. There were many reasons for this turn of events. Until World War One, foreign private capital played an active role in the development of Chilean nitrates and other mineral resources. This brought the country into close commercial contact with the more industrialized nations, helped to promote its exports and acted as a gen9ral economic development catalyst. Although with the advent of synthetic nitrates Chile's monopoly position in nitrates was seriously undermined, the development and export of copper provided a strong substitute for nitrates and played essentially the same vital role in furthering the country's economic growth. 2. The sharp drop in the demand for copper and the precipitous decline in the price of copper r Chile's export earnings in the enrly 1930's to only 305 of their previous levels and inflicted a serious paralysis on the Chilean economy - particularly on her incipient industries which largely depended on imported raw materials and spare parts. This situation led to an attempt to diversify domestic industrial production by establishing a wide variety of Government-sponsored and Government-owned industries. To achieve this transition in an orderly manner required the substitution of domestic public savings for the previous inflow of foreign private capitale However, the social and economic pressures for growth through expansion of import- substitutes were not matched by the willingness and ability to produce and to save. Increases in consumption were deranded by all sectors of the population and in the absence of a substantial growth in production, these claims resulted in reduction in the proportion of Gross National Product devoted to investment and in distortion of investment. Domestic savings declined in relation to the national product and much of the industrial development that took place occurred at the expense of growing external indebtedness. Between 1950 and 1958, prices increased fifteenfold and money supply, seventeenfold, while real income per head virtually stagnated. 3. A new administration took office in late 1958, determined to achieve the financial stability which it considered prerequisite to growth. Despite the shock of the disastrous earthquakes and tidal wave of mid-1960, and the emergency expenditures they called forth, the Government succeeded (by drawing on reserves and with substantial external finance) in withstanding inflationary pressures until mid-1961; and per capita income, after a decline in the last two years of the 1950's, swung upward once again in 1961.  4. Stability was a necessary condition for the renewal of substantial growth, but not sufficient for it. For the country faced deep-rooted diffi- culties: a high level of consumption and relatively little saving; lack of confidence on the part of private investors; stagnation of agriculture; high level of Government subsidies to the private sector, including subsidies for goods and services produced by State enterprises, etc. It was clear that a renewal of growth required a systematic and rational effort over a long period of time to remove institutional obstacles to growth, to stimulate private in- vestment and to carry out a public investment program. Accordingly, the new Government encouraged CORFO to proceed with the completion of a Ten-Year Development Program that had long been in preparation. That program was revised after the 1960 earthquakes and completed and adopted by the Government in 1961. The Program 5. The major objective of the 1961-70 program is to bring about an increase in the gross domestic product of 5.5% per year, or 3% per capita annually (above the 2'B% population growth). This compares with an increase of hardly 1% per person per year in the 1950's. An accomplishment of this magnitude will require a major organizational effort, and no less an effort in planning and administration. But the principal action on which success de- pends is an increase in domestic investment from less than 10% of domestic product, prevailing in the recent past, to over 18% in 1970 -- almost a doubling within 10 years; and this, in turn, depends on saving 30% of the projected increase in output. Even with this increased savings rate, private consumption should grow at 2% per head if the output goals are realized. In the mission's view, the objective of the program and the measures required to carry it out - although they would require a sharp break with Chile's past - are not unreasonable in the light of standards generally applicable to countries at Chile's income level. 6. With certain modifications (chiefly an increase in the emphasis on agriculture, and on highways at the expense of railways, and a stepping up of Government support to private enterprise in the earlier years) the mission considers the allocation of resources visualized in the program a suitable and commendable framework for concerted action to accelerate the growth of the Chilean economy. As modified by the mission, the 10-year program calls for fixed investment of EO 9.5 billion at 1960 prices. Of this total, E